“Smells Like Opportunity”

Over the past decade, few segments of the population have felt the squeeze of the country’s affordable housing crisis as acutely as middle-income households earning between 60 and 120 percent of the area median income. Earning too much to qualify for most government-subsidized housing programs but too little to afford the majority of new housing stock entering the market, these renters are finding themselves less and less able to secure high-quality housing within their means.

According to the most recent data published by Harvard’s Joint Center for Housing Studies, since 2019, the share of cost-burdened renters has increased the most for middle-income renter households across the country, which the study defines as earning between $30,000 to $74,999 annually.

In response to the growing challenge of middle-income housing—often referred to as workforce housing—Fannie Mae and Freddie Mac (the GSEs) have recently rolled out three programs aimed at easing the rent burden for that segment of the population: Fannie Mae’s Sponsor-Initiated Affordability (SIA) and Sponsor-Dedicated Workforce (SDW) programs, implemented in 2021 and 2023, respectively; and Freddie Mac’s Workforce Housing Preservation (Prez) program, also implemented in 2023.

Though all three programs have some differences in scope and operation, together, they represent a shift in the federal response to today’s housing crises by targeting not just the poorest in society, but all cost-burdened renters. “The roll-out of the voluntary restriction programs from the GSEs signals that the issue has gained national prominence and requires broad-based solutions,” says Michael LoStocco, vice president for agency financings at PGIM Real Estate.

The first of the three programs to roll out was SIA, which provides more competitive pricing and wider underwriting flexibility to projects that voluntarily set aside at least 20 percent of units for restricted rents accessible to those earning 80 percent AMI or below. Applicants willing to self-restrict more units and make a greater impact on affordability may qualify for more favorable loan terms. SIA particularly appeals to committed affordable housing owners, since it has a slightly more stringent compliance regime in exchange for more favorable loan terms. For example, SIA sets income restrictions, as well as rent restrictions for the life of the loan and requires third-party annual certification and an affordability agreement.

In return for the heightened compliance, SIA offers favorable loan terms. One chief advantage is a low debt service coverage requirement, as low as 1.20 times net income, compared to the 1.25 offered by SDW and Prez.

For owners seeking less restrictive compliance regimes for still-favorable loan terms, SDW and Prez are excellent options. Both programs have a similar structure, setting rent controls within the loan documents and requiring straightforward annual certification from borrowers. Unlike SIA, income is not restricted for these programs, allowing for a wider pool of tenants and a less burdensome tenant application process.

All three initiatives, beyond the initial favorable loan terms, can unlock additional benefits for owners, says LoStocco. For example, he points out, “in some jurisdictions, voluntary rent and income restrictions can fulfill the requirement to obtain a state or local tax abatement for affordable housing, which is often what makes a deal feasible.” To best navigate the tax components of these deals, LoStocco urges developers to work with trusted local counsel, and experienced affordable housing finance teams, such as those at PGIM, to understand “the nuances of tax abatement programs versus the requirements of the Agencies.”

All three initiatives have deep appeal to conventional market-rate multifamily housing owners who could benefit from the voluntary restriction programs’ competitive pricing, generous proceeds and potential for lengthy amortization periods. However, owners of Low Income Housing Tax Credit-assisted affordable housing can also benefit from these programs, particularly as a means to keep their buildings online and in service.

This is particularly critical for the over 223,000 LIHTC-assisted properties whose rent restrictions will expire in the next five years, says LoStocco. “These new programs could help bridge the gap between de-regulation and rehabilitation of a property with an additional subsidy that would require more long-term affordability with a government agency, such as a new LIHTC allocation or subsidy from a state or local government.”

No matter if the owner is a seasoned LIHTC sponsor or a market-rate developer looking for help on the margins, LoStocco notes that success with these voluntary restriction programs hinges on owners’ attitudes towards rent restriction and the social impacts intended by the GSEs. “These voluntary restriction programs work best when a developer also has social motivations around providing workforce housing,” LoStocco implores. “The programs are best complemented by having strong resident services programming in place at the property level.”

Additionally, LoStocco cautions that understanding a potential project’s tenant base can offer challenges, particularly in avoiding displacement during the voluntary restriction process. “It’s important to understand if existing tenants meet the requisite income requirements,” LoStocco says. “Ideally, you would not be creating turnover at a building to impose these restrictions.”

However, those challenges are minor compared to the substantial debt upside and social impacts offered by these new voluntary restriction programs. “These programs are critical to providing safe, decent affordable housing for working families and singles across the nation,” says LoStocco. “I imagine that with the improvement of market conditions and the return of a more robust transactions environment, this will change, and these programs will garner the attention they deserve.”

At National Housing & Rehabilitation Association’s recent fall conference at the Raffles Boston, where he was presenting as part of the Debt Financing Issues & Trends panel, LoStocco asked the audience in attendance if any had closed Fannie or Freddie loans using these programs. “There was a limited response from the audience, and I was stunned by that,” he recalls. In response, LoStocco quipped to the audience: “That smells like opportunity!” Indeed, it does.